Curbing the DDA

Council caps its tax take

For the past year, Steve Kunselman has been using the city's Downtown Development Authority as a political punching bag.

Asked why, the Ward Three councilmember answers with a question of his own: "Why did mayor John Hieftje create a DDA so distrusted that Steve Kunselman would punch them?"

Always complicated, the relationship between city council and the quasi-independent authority intensified as Mayor Hieftje's council majority shrank in recent elections. Once an outsider, Kunselman now shares his doubts about the DDA with a growing group of allies--Mike Anglin, Jack Eaton, Sally Hart Peterson, Jane Lumm and, especially Sumi Kailasapathy.

"The members of the DDA board are in custody of [an annual budget of] over 20 million dollars," Kailasapathy emails. "Yet, they are never elected, continue their positions for decades and function as a shadow government."

According to Kunselman, "the relationship between the DDA and council deteriorated because John Hieftje serves on both the board of the DDA and city council. He's appointed former elected officials to the board, and they have nothing to do other than please John Hieftje."

Council approves the mayor's appointees, and major DDA projects--roughly 80 percent of its budget goes to building and operating the city parking system--require City Council approval. But Kunselman and Kailasapathy are correct that even as the mayor's support has faded on council, it's flourished at the DDA. Until this past June, its board was chaired by former county commissioner Leah Gunn, a veteran political operative who helped create and defend the Hieftje majority. It's now chaired by former councilmember and Hieftje loyalist Sandi Smith--who can look for support to another council vet, Joan Lowenstein.

"The biggest issue is that the DDA has been politicized," Kunselman continues. "Now it's really a patronage organization that gives out grants of public tax dollars."

Until Jack Eaton's November election, Kunselman, Kailasapathy, and the rest were a minority on council. Now they have the power to change the city's direction--and they're starting with the DDA.

In November, council passed a Kunselman-authored

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measure that will limit future increases in the DDA's tax revenue. And if it tries to resist the new majority, Kunselman warns, "the city council has the authority to close the DDA."

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Council Republicans under then-mayor Lou Belcher created Ann Arbor's DDA in 1982. To finance it, they turned downtown into a tax increment financing (TIF) district. The DDA "captures" increased tax revenues from downtown redevelopment--money that otherwise would go to local taxing authorities--and uses it to finance public improvements.

Council had specific improvements in mind: beautifying downtown sidewalks and building parking structures. The DDA built the Ann-Ashley and Tally Hall structures, then took over management of the older structures as well. At the time, they were literally crumbling after decades of deferred maintenance, and costing the city's general fund $250,000 a year.

DDA executive director Susan Pollay recalls that when she was hired in 1996, the group's "first priority was fixing the parking structures and fixing them forever." That it did: the parking system--now including street spaces as well--will likely gross $19 million this year. The parking structures are 80 to 90 percent full at least half of weekdays, and a strict maintenance schedule keeps them in good repair.

As the parking system's finances improved, the city's deteriorated. Instead of drawing from the general fund, parking now supports it. "They send 17 percent, or $3.2 million a year, of their parking revenue to the city, and that's right off the top," Hieftje says. "And they give $500,000 a year to pay the bond on the new police/courts building, so that very little from the general fund goes into paying for the building."

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Unlike some of his allies, Kunselman supported the police/courts building and says the DDA funding is "a bona fide contribution." But asked what else the DDA has accomplished, he replies: "Less than people think. Their big accomplishment is putting a good face on downtown for marketing. I don't see much except the streetscape"--the widened sidewalks and plantings downtown.

He shrugs off the reconstruction of the parking system, saying he "didn't have a problem parking" before the DDA took over. And at the most basic level, Kunselman questions whether downtown even needs special tax treatment. "Downtown isn't fragile," he says. "It's the wealthiest part of the town."

DDA chair Sandi Smith disagrees. "Any downtown remains fragile even if it seems robust," she says. "They do not magically stay healthy. They take a lot of thought and care."

Susan Pollay argues the DDA is doing very well by the city. "When the DDA was created, there were $1.3 million in tax revenues for the city from downtown. That number is now $4.1 million," over and above the taxes captured by the DDA.

Lou Belcher agrees with Kunselman that downtown is thriving--but unlike the councilmember, the former mayor gives the DDA much of the credit. "Our downtown is a lot better because of the DDA," Belcher says. "It's the most vibrant in Michigan if not the whole Midwest. We've made tremendous strides because of the DDA--and they've done a good job with the parking."

But as downtown grew in the last decade, so did the taxes "captured" by the DDA--from $3.2 million in 2003 to an estimated $4.5 million this fiscal year. Kunselman considers that "a gross injustice." The authority, he says, "should give the money back."

Kailasapathy agrees. "We are not living up to the language specified in our ordinance which clearly states that excess TIF capture has to be returned to the jurisdictions from which we are taking these monies," she emails. "This type of action on the part of the DDA is financially and morally wrong. I consider this behavior cheating."

Of course, the DDA isn't just getting more revenue--it's also spending more. The new Library Lane structure alone cost $50 million, financed with bonds that won't be paid off till 2035. Last year, the DDA's bond payments totaled $6.6 million, or $2.1 million more than its TIF capture--leaving no excess to be returned to the other jurisdictions.

But Kunselman doesn't believe the state even intended cities to use TIF funds to build parking. His goal, he says, "is to take the TIF money out of the parking system."

He took a big step in that direction in November, when council amended the DDA ordinance to limit the taxable value subject to tax capture. Authored by Kunselman, it will effectively cap the authority's tax revenue at about $6 million a year. Once that limit is reached, the TIF can grow no more than 3.5 percent a year.

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John Hieftje says that he and Kunselman got along well during the councilmember's first term, from 2006 to 2008. "We had similar voting records," the mayor recalls, and he appointed Kunselman to planning commission.

But in the 2008, Kunselman lost a Democratic primary to Christopher Taylor--and he blamed Hieftje.

"Roger Fraser [then city administrator], Ed Petykiewicz [then editor of the Ann Arbor News], and John Hieftje were the people behind the scenes working together to unseat me," Kunselman says. "That year the Ann Arbor News' election editorial was written by Ed, who endorsed my opponent. Roger and Ed often had lunch together, and they misrepresented my actions to defame me. It was a very organized effort, and you just have to connect the dots to see John Hieftje was behind it."

Hieftje says he had no reason to oppose Kunselman, didn't know Taylor, and wasn't asked to endorse either candidate. And Petykiewicz, now retired, calls the charge that he conspired with the city administrator "absolutely wrong."

"Ed and I had lunch maybe twice," says Fraser, "and Kunselman's name never came up. We talked about policy or our families."

Kunselman insists there's nothing personal in his attack on the DDA: "Ignoring valid concerns creates distrust," he says. But asked if the DDA has ignored his own questions, he admits, "I have not asked specific questions to them." Has he ever called them when he has a question? "No."

That hasn't stopped him from claiming the group misled council and the public. "They're laundering TIF money through the parking system and subsidizing the parking system with money from other taxing authorities," he charges. "Tax dollars are paying for parking structures, but it's not shown in their reports. They commingle TIF and parking revenues in a way that makes it hard to understand."

Kailasapathy, an accountant and a member of the council's DDA audit committee, agrees. "When studying the audited financial statements for fiscal year 2012/13, we noticed that the financial statement footnotes specifically states that parking fund monies are used to service parking debt. What it fails to mention is that TIF fund monies are also used to service debt. So in effect TIF funds are subsidizing their parking misadventures!" She points to the costly Library Lane structure, where council spent a "speculative" $5 million for reinforcements to allow an as-yet-unidentified building to go on top.

"No, we're not laundering money," responds DDA assistant director Joe Morehouse. "Mr. Kunselman totally misinterpreted the financial reports. Like most government agencies, the DDA has one checking account to pay all its bills, and in our case it comes out of the TIF funds account. But at some point the other funds have to pay them back, and that's what he misunderstood."

Morehouse agrees that "the DDA uses TIF money to pay some of the debt service on the parking structures. But that has gone on for the entire life of the DDA. TIF money does not pay for operating expenses for the parking system, but it does pay some of the bonds, because decks are an improvement to the city, since the city owns them."

Kunselman's amendment to the DDA ordinance also adds a provision requiring the authority to file timely financial reports. It's needed, he says, because "TIF reports have not been produced by the DDA in the last decade." Kailasapathy agrees, saying, "DDA did not file TIF reports for a long time."

Kunselman says it's not just councilmembers who mistrust the DDA. "The library had questions, so they sent a letter to Susan Pollay, and she never responded. Ask [library director] Josie Parker about her letter. Ask her who believes what the DDA tells them now."

According to Parker, though, "the DDA responded in a responsible and timely manner. Susan and I had a conversation and an open discussion of the issues," she says. "We've had an amicable and open relationship for as long as I've been here: eleven and a half years. Susan has been extremely responsive." Indeed: Library Lane is so named because it's right outside her front door.

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Hieftje suggests Kunselman punches the DDA because "they don't punch back, so they're an easy target for a bully. If discussions this year had started in a cooperative way, it would have been much easier. But Kunselman was confrontational. He was all about 'we have more power than you, and we're going to exercise it.'"

"It's easy to beat up those who are under you," agrees Sandi Smith. "Also, the DDA is an attractive target because there's money at the DDA. and the city has needs.

"Obviously Steve has made the DDA a target because he gets political mileage out of it," Smith adds. "And some of it is personal because some board members have backed his opponents." According to campaign finance reports, since 2008 three members of the DDA board--Gunn, Lowenstein, and John Split--have given money to Kunselman's challengers.

"I'm not doing it for revenge," Kunselman responds. "This is politics. DDA board members support the mayor and are using their appointment for political purposes--so is it me or is it them that are playing politics?"

Politically and financially, Kunselman is winning at the moment. DDA treasurer Roger Hewitt says he can't say just how much the valuation cap will cost the authority, because that will depend on how much redevelopment happens downtown. But Tom Crawford says that the cap will limit the group's bonding capacity to about $57 million over the next ten years. Without it, he estimates, it might be $100 million or more.

By the time the cap takes effect in 2016, Kunselman hopes to be mayor himself: he's already declared he's a candidate in 2014. "I've perceived growing public distrust in the DDA and in city government," he says. "The trust is so damaged at the council table now that I can't trust John Hieftje. That's why I'm running." In effect, he'll be the anti-Hieftje candidate--in the first mayoral election in fourteen years without Hieftje, who has announced he's retiring at the end of his seventh term.

Though he warns that council can disband the DDA, Kunselman says, that's not his goal. "The DDA performs a vital function," he says, in building infrastructure. He'd even leave the authority in charge of the parking system--though he doesn't want it using TIF money to build more.

Whoever succeeds him as mayor, Hieftje believes "the DDA will still be here and will continue to improve the downtown." Board chair Smith hedges her bets. In future years, she says, "I hope the DDA is still going strong."

Susan Pollay also sees the DDA weathering council's moves to curb it, and has no plans to leave. Despite the difficulties, she says, "I have the best job in the world. Look at all the good we do."

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The following Calls & letters item was published in the February 2014 Ann Arbor Observer:

Filed but not published

Our December feature on the Downtown Development Authority mischaracterized part of councilmember Steve Kunselman's amendment to the city's DDA ordinance. We said it required the authority to "file" timely reports; in fact, it requires the DDA to "publish" them.

Both Kunselman and Sumi Kailasapathy told us that the DDA had failed to file required reports for many years. They were mistaken about that--both city CFO Tom Crawford and state treasury spokesperson Terry Stanton confirmed that the authority filed its annual reports with the city and state. But Kunselman is correct about publication, which for legal purposes means appearing as a paid ad in a newspaper. There's no evidence that the DDA published its reports until 2011, after Kunselman raised questions about them.

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The following Calls & letters item was published in the March 2014 Ann Arbor Observer:

Neither filed or published

A correction in our February issue was itself mistaken: we wrote that the DDA's annual reports were filed with the city and state, but not published in a newspaper of record. In fact, the reports were neither filed or published--just as Steve Kunselman and Sumi Kailasapathy had contended.

Our apologies to Kunselman and Kailasapathy for the error, which stemmed from our confusion over two different mandated DDA reports. The city clerk confirms that the group has since filed a complete set of annual reports covering the past ten years.